Is This the Dip to Buy?
It's Veteran's Day, I'm taking a moment to recognize the sacrifice and dedication of our military.
The bond markets are closed today, so we're losing an important catalyst for the stock market. Without the running gauge for the U.S. dollar, traders will have to depend on recent news to drive the action today. And that may not be a good thing...
Cisco (Nasdaq:CSCO) is down huge after its earnings report last night. The company beat earnings by a couple pennies, but offered guidance that was well below expectations.
I'm not sure Cisco has ever traded down 16% after earnings. The stock will be testing its late-August lows, which is also a 52-week low. There should be pretty good support at $20, established in 2009. But this action still throws a pretty sizable monkey-wrench into the rally.
I'm not sure how Treasury Secretary Tim Geithner keeps a straight face when he says, “We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.”
I suppose one could argue that the weaker U.S. dollar is an unintended consequence of Fed policy. But there's no way you can argue that the weaker dollar is a surprise. And so we simply must consider that the weaker dollar is an acceptable, if not outright desirable, consequence the Fed's asset purchases.
Some are theorizing that the Fed and Treasury are attempting to break the Chinese yuan peg to the dollar. By devaluing the dollar, the yuan is also devalued. And given the rising inflation in China (CPI rose 4.4% in October), China needs to act.
It's already raised reserve requirements at banks to slow inflation. And it's raised interest rates, too. China will do more to control inflation. It may have no choice but to raise interest rates and crack the peg to the U.S. dollar.
I'm not sure how much of a victory this would really be. It seems unlikely that the Fed would reverse policy just because China raises interest rates. On the other hand, a stronger yuan would affect a trade balance that has been in China's favor for years.
Now, I expect many of you are wondering if this is the dip to buy. There's no doubt that the major indices are stretched. And the action on the S&P 500 clearly resembles what we've seen ahead of corrections this year.
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